CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Closing a Target Cost Gap - Notes ^{3 / 7}

Where a gap exists between the current estimated cost levels and the target cost, it is essential that this gap be closed.

Efforts to close a target cost gap are most likely to be successful at the design stage.

It is far easier to ‘design out’ cost during the pre-production phase than to ‘control out’ cost during the production phase.

Ways to reduce a cost gap

1. Review the product’s features.

2. Remove features that add to cost but do not significantly add value to the product when viewed by the customer (non-value-added activities). 

   This should reduce cost but not the achievable selling price (value engineering / value analysis).

3. Team approach - cost reduction works best when a team approach is adopted. 

   The company should bring together members of the marketing, design, assembly and distribution teams to allow discussion of methods to reduce costs. 

   Open discussion and brainstorming are useful approaches here.

4. Review the whole supplier chain - each step in the supply chain should be reviewed, possibly with the aid of staff questionnaires, to identify areas of likely cost savings. 

   For example, the questionnaire might ask ‘are there more than five potential suppliers for this component?’ Clearly a ‘yes’ response to this question will mean that there is the potential for tendering or price competition.

5. Efficiency improvements should also be possible by reducing waste or idle time that might exist. 

   Where possible, standardised components should be used in the design. Productivity gains may be possible by changing working practices or by de-skilling the process. 

   Automation is increasingly common in assembly and manufacturing.